Oil tanker glut deja vu sours Ross, Ardmore investments

Bloomberg News

Published 9:18 pm, Friday, March 21, 2014

Photo: Robin Platzer, Robin Platzer/FilmMagic

Image 1of/1

Caption

Close

Image 1 of 1

Wilbur Ross, the billionaire known for turning around struggling industries, pulled an initial public offering last week of a Greenwich-based tanker operator because he said the price was too low. Contributed photo/Robin Platzer/FilmMagic less

Wilbur Ross, the billionaire known for turning around struggling industries, pulled an initial public offering last week of a Greenwich-based tanker operator because he said the price was too low. Contributed ... more

Photo: Robin Platzer, Robin Platzer/FilmMagic

Oil tanker glut deja vu sours Ross, Ardmore investments

1 / 1

Back to Gallery

Six years after shipowners ordered too many vessels before the global recession, driving down rates and leaving new ships anchored for lack of cargoes, investors are souring again on oil-product tankers in the face of a new glut.

This time around, some of the optimism was fueled by private-equity firms including WL Ross and Blackstone Group lured by bets on rising demand because of growing U.S. and Middle East exports of oil products. Instead, chartering rates fell by a third as orders for new ships more than doubled. Wilbur Ross, the billionaire known for turning around struggling industries from steel to textiles, pulled an initial public offering last week of a Greenwich-based operator of Medium-Range product tankers because he said the price was too low.

Ardmore Shipping sold shares earlier this month for less than the value of its fleet, according to Global Hunter Securities. Shares of Scorpio Tankers, the largest owner of the vessels, dropped 12 percent this year, compared with a 1 percent gain in the Standard & Poor's 500 Index of U.S. equities.

"People are beginning to realize there's just too many product tankers," said Jeff McGee, the founder of Makai Marine Advisors in Dallas. "Find a good sector with promising demand prospects and over-order. Nobody learned their lesson."

Investors expected product tankers to benefit from rising U.S. and Middle East exports, said McGee, who used to lead tanker research at Poten & Partners, a shipbroker. The U.S. is shipping a record 3.7 million barrels a day of refined fuels, 16 percent more than a year ago, the Energy Department says. Middle East refinery output will reach 8.7 million barrels a day by 2016, up from 7.8 million last year, Morgan Stanley says.

Prospects for rising demand spurred more ordering. Shipyards in 2013 were booked to build 217 product tankers smaller than 60,000 deadweight tons, the size range of Ross's and Ardmore's fleets, according to data from Clarkson, the largest shipbroker. That's more than double the previous year and the most since 2006. Outstanding orders are equal to 20 percent of the existing fleet, up from 16 percent a year ago, the data show.

Rate gains haven't materialized, while the backlog of new vessels could create a glut. Rates for Medium-Range product tankers fell 32 percent in the past year to $10,732 a day, Clarkson data show. Last year's average of $13,226 was the highest since 2008.

Spot rates for the vessels fell this year as the coldest winter in the U.S. since 1982 increased domestic fuel demand and the profit from shipping European gasoline to the U.S. diminished, said Fotis Giannakoulis, a New York-based analyst at Morgan Stanley. The fleet will expand by 5.1 percent next year, the most since 2010, the bank estimates.

"Investors' expectations were significantly higher than reality, and a lot of the stocks were trading with overly optimistic expectations," Giannakoulis said. As fleet growth accelerates, "it's going to be very hard to see meaningful rate increases," he said.

Private-equity firms contributed to the rush to buy product tankers as they invested the most since at least 2008 in shipping, according to Stamford-based Marine Money, an industry newsletter. Blackstone, the world's largest manager of alternative assets, invested more than $100 million in ships in the past two years, including stakes in nine product tankers.

Ross and his co-investors spent about $900 million on 30 product tankers in 2011. It was the 76-year-old billionaire's first venture into shipping.

Since then, the price of a five-year-old MR tanker, the type owned by Ross's Diamond S Shipping Group, of Greenwich, rose 0.4 percent to $28.9 million, according to the Baltic Exchange in London.

"I don't think he will come remotely close to what he was expecting to make on this trade," said Basil Karatzas, a shipbroker and adviser in New York. "His timing was premature, and too many people played the same card."

Ross said he's happy with the investment because the tankers had long-term charters while competitors lost money amid low rates.

"When we originally embarked on the process, there was more market optimism," Ross wrote in an e-mail. "Shipping stocks are very volatile, and we have the staying power to wait until an upturn in charter rates becomes more clear."

Diamond S, which owns 33 tankers for carrying refined fuels, had filed to sell 14 million shares in a range of $14 to $16 each, according to its prospectus. The company, which intended to use the proceeds to buy 10 ships, planned to price the shares March 11. Ross pulled the offering that day. Other shareholders include First Reserve and a unit of Cargill, the commodities trader, its website shows.